Kiva Review: Micro Lending With A Global Reach

by The Smarter Wallet on Small Business

Our Kiva review touches upon the world of peer to peer lending and showcases an interesting community called Kiva.org. This is microlending with a global reach! For more examples of social lending, you can also check out this Lending Club review.

Kiva micro lending
Kiva Microlending

Online person to person lending has become one of those activities that’s picking up interest, especially during this era of tighter credit. Typically, it’s become a form of alternative investment for some investors (lenders) as well, though not all lending networks support this goal.

I’m familiar with Lending Club and Prosper, but one such social lending site that I hadn’t investigated till recently is Kiva.org, which focuses on matters of international business and finance; it’s a non-profit organization that helps you make micro loans to small businesses in third world countries.

Kiva: Micro Lending With A Global Reach

In Swahili, the word “kiva” means “agreement” or “unity”. Lenders choose a business and make a loan by using a credit card online at the Kiva website. Kiva then transfers the loan proceeds to local partners, who distribute the loans to the businesses. Over time, the local partner collects repayments and offers business updates through Kiva. Ultimately, your loan is repaid and you can withdraw the money or lend it to another business. The purpose of Kiva is to connect you with needy third world businesses looking for loans.

How Does Kiva Work? Can You Make Money With Kiva?

I like the idea behind Kiva, which is to help people establish businesses so they can pull themselves up from poverty. Loans are extended in units of $25. When money is repaid on the loan, it is deposited into your Kiva account (which can be connected to a PayPal account). You can choose to withdraw the repaid money or lend it again. But no interest is paid on Kiva loans to the lender, so this is not the place you’d expect to make money as a lender.

Tip: If you’re looking to make money on your loans, then you should instead try a lending community like Lending Club, where you are able to lend money for profit; here, you can expect an average annual net return of 9.5% (of course, based on the loans you fund).

So as far as Kiva’s premise goes — beyond it being a noble idea — you may wonder how such loans may be beneficial for you.

The Benefits Of Lending At Kiva

1. Kiva can help you achieve an international presence.

Small businesses join Kiva for the benefit of creating an international presence. As a lender, you can lend to third world businesses in similar industries to extend your global reach. You can also make your business more friendly to international clients by showing your participation in Kiva on your website and company promotional items.

2. Kiva provides a platform for educational research.

As a teacher, administrator, corporate leader or researcher, you may want to learn more about how the international business climate works. Kiva provides an avenue for this kind of learning and is an outstanding educational tool in the classroom or boardroom to show how businesses lend money, grow and expand globally.

3. Kiva loans help grease the wheels of the worldwide economy.

The worldwide economic climate has a rippling effect on every country. We hear a lot about initiatives to support small businesses and free trade across borders, but now here’s one way for us to directly make a difference in the global arena. We can actually put our money where it matters by lending to third world businesses. Through Kiva, instead of just talking about making global change, we’ve got the power in our hands to actually instigate changes, even with modest amounts of money to invest.

Kiva In The Media

I’ve read that Kiva has had great coverage in the media lately — they were featured on The Oprah Winfrey Show last year, on CNBC’s Business Nation, the Today Show and BBC. They’ve been growing in terms of loan volume and staff over the last year as well, and landed the honor of being on the TIME list, “50 Best Websites in 2008″. So it seems that they’re gaining a lot of traction in the microlending space.

The Risks of Micro Lending At Kiva

Factually speaking, the default rate for the $19,050,735 loans made through Kiva is 2.8 percent. It seems to be at par with risk assessments of other peer to peer lending networks like Lending Club (although it has been reported recently that for Lending Club’s highest quality loans, the default rate has been ZERO). But like any other social lending site, it has its risks — and to me, it seems like lending through Kiva would entail far more risk than with other sites like Lending Club and Prosper, since lending is done at the international level, and business in other parts of the world is conducted differently than in the United States. Some notes on this matter:

  • There’s the risk of dealing with entrepreneurs you don’t know directly. You’d have to trust the Kiva Field Partners who are responsible for screening business owners for health issues as well as for the viability of their businesses. There is accountability through the Field Partners.
  • Kiva Field Partners are assigned risk ratings from 1 to 5, with 5 as low risk. Bankruptcy, fraud and operational errors are some of the factors affecting ratings.
  • Other countries are subject to macro risks: the country’s politics, economy, natural environment and infrastructure can influence the progress of small businesses you’re funding.

The Bottom Line

You’d have to determine whether you can accept the risks of lending your money to overseas interests and decide whether you’d like to put your money to use in this way. If you choose a Field Partner with a risk rating of 5 and a business with few macro economic constraints, you’ve got a good chance of avoiding defaults. Lending through Kiva should be thought of as an altruistic endeavor, and as a way to deploy your money for the good of others, and not for profit. In the literal sense, it’s definitely one way to share the wealth, as they say!

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{ 9 comments… read them below or add one }

1 Kieran January 27, 2009 at 7:36 am

Another reason why Kiva might be beneficial to the lender is that the investment is tax deductible as it is considered a donation.

I do lend at Kiva for altruistic reasons. It’s the feel good helping hand action. For return on investment, I prefer Lending Club over the other p2p lending sites.

2 Michael Bonanno October 13, 2009 at 8:34 pm

Actually I have to correct Kieran. Because Kiva is considered a Non-Profit and you are making a loan..it is not tax deductible. Only when you are making a donation is the money deductible.

Hope this helps clarify the tax comments.

Best of luck!

Michael Bonanno

3 The Smarter Wallet October 13, 2009 at 8:53 pm

Thanks for the discussion on tax deductibility when making loans vs donations. It’s definitely something that needs clarification when people get involved with dealing with non-profits.

4 Deborah April 3, 2010 at 11:05 am

Would I have to file a tax form at the end of the year with the IRS on the lending of my money? If so… what form would I need to use for that?

Thanks

5 Evance Mwijage May 20, 2010 at 9:09 am

Thanks a lot for lifting peoples lives, I am a Tanzanian who wants to open the shop in Dar-es-salaam. Unfortunately, I have no way to start. So I’m asking if you can help me get a LOAN to fulfill my dreams. I hope you can send me the procedures on what to do. Thanks for your kindness.

6 The Smarter Wallet May 21, 2010 at 6:31 am

@Evance,
This article points you to how you can get a loan — you’d do it through Kiva. Please visit their site for more information. You can sign up with them and see if you qualify for a loan. Best of luck!

7 Snowball September 3, 2010 at 10:12 am

Another thing to think about is that you could do some good for the world while sheltering your money. For example, if you needed your savings to appear temporarily lower while your kids are applying for college — put it with Kiva, then take it back after awhile. win win

8 Central Bank News October 7, 2011 at 8:04 pm

If you are a non-US lender you may expose yourself to USD fluctuations against your home currency, which could be upside or downside. You could add more to your account when your home currency is stronger vs the US dollar. Of course – you can gain currency exposure by a lot of other means.

I do wonder though, if you can gain from currency fluctuations in the actual loans you make — you can be exposed on the downside apparently… anyone know the answer?

9 Janet G March 3, 2012 at 4:31 pm

You didn’t mention the huge interest on the loans that the financial institutions are charging those poor people. The average loan interest that those financial institutions charge is 23%!

This is unfair. How can you loan a poor person 100 dollars and expect them to pay the financial institutions back 123 dollars (or more!!) ?

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